Regulation of Forward and Futures Contracts in India

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What is the name of the price one pays for using a unit of another person's money?

Exchange rate

Interest rate (correct)

Transaction cost

Inflation rate

Which factor has greatly enhanced competition due to globalization?

Reduced profit margins

Increased market size (correct)

Improved quality of goods

Increased consumer spending

What technological advances have driven significant growth in derivative instruments?

Enhanced method of data entry

Satellite communications

Telecommunication breakthroughs

Development of high-speed processors (correct)

In the context of technological advances, what allows for instantaneous worldwide conferencing?

Advances in telecommunications Signup and view all the answers

What has facilitated the more rapid movement of information according to the text?

Advances in software programs Signup and view all the answers

Which aspect has globalization not brought about, as mentioned in the text?

Irrelevance of other parts of the world Signup and view all the answers

What was the initial hedging tool available before the development of option pricing models?

Forwards contracts Signup and view all the answers

Who developed the option pricing models that were used to determine the prices of call and put options?

Black and Scholes Signup and view all the answers

What did the work of economic theorists give rise to, which led to the growth of derivatives in financial markets?

New financial products for risk management Signup and view all the answers

What type of risk typically emerges in certain derivative trading?

Market risk Signup and view all the answers

How would you describe the derivative market in India?

Relatively new and developing Signup and view all the answers

What is the purpose of the various committees that have been set up to review the functioning of financial and derivative markets in India?

To ensure that investors' risk management needs are fulfilled Signup and view all the answers

Which Act regulates forward/futures contracts in commodities across India?

The Forwards Contracts (Regulation) Act, 1952 Signup and view all the answers

Which regulatory authority has jurisdiction over commodity forward/futures contracts?

Forward Markets Commission (FMC) Signup and view all the answers

Which regulatory authority oversees derivatives trading in securities?

Securities Exchange Board of India (SEBI) Signup and view all the answers

What is a defining characteristic of a financial derivative?

Both a and b Signup and view all the answers

Which of the following is NOT a feature of financial derivatives?

Its value is fixed and does not change. Signup and view all the answers

What are some examples of underlying assets that financial derivatives can be based on?

All of the above Signup and view all the answers

What is the primary difference between short-term and long-term futures contracts?

Short-term futures mature within a year, while long-term futures mature in more than a year. Signup and view all the answers

How is the price of an interest rate futures contract derived?

The price is 100 minus the implied interest rate. Signup and view all the answers

What is the key reason that the default risk is nil for these interest rate futures contracts?

The prices depend only on the interest rates, not on the creditworthiness of the parties. Signup and view all the answers

What is the primary purpose of using a long hedge with T-bill futures?

To hedge against short-term interest rate risk. Signup and view all the answers

How can an interest rate futures contract be used to convert a fixed-rate loan to a floating-rate loan?

By using the futures contract to compensate for changes in the underlying interest rate. Signup and view all the answers

What is the primary benefit of using a short hedge with interest rate futures for an issuer of a floating-rate loan?

It compensates the issuer for having to pay higher interest rates to investors. Signup and view all the answers

What is one of the key roles of derivatives in financial markets?

Disseminating information on futures markets trading Signup and view all the answers

How do derivatives contribute to resource allocation in the economy?

By facilitating appropriate and superior allocation of resources Signup and view all the answers

Why do derivatives enhance liquidity in the markets for underlying assets?

Because they are based on margin trading, requiring less capital upfront Signup and view all the answers

How do derivatives assist investors and fund managers?

By enabling them to devise strategies for proper asset allocation and yield increase Signup and view all the answers

What effect do derivatives have on price structure in the markets?

They smooth out price fluctuations, squeeze price spreads, and integrate price structure Signup and view all the answers

How do derivatives contribute to the growth of financial markets?

By encouraging competitive trading and accommodating different risk preferences Signup and view all the answers